EPCs and MEEs: What is the change in the law?

Two legal updates to note:

  • From 1 April 2018 it will be unlawful for a landlord to grant a new lease, or to renew an existing lease, of commercial premises that have a substandard EPC rating of F or G.
  • From 1 April 2023, MEES will make it unlawful to ‘continue to let’ substandard commercial premises.

Failure to comply means that the landlord will be in breach of the Regulations. The first step will be the service of a compliance notice on the Landlord. Thereafter the landlord could be subject to a fine for a sum between £5,000.00 and £150,000.00 depending on the length of term and rateable value of the property. Fines can also be charged if the landlord puts misleading information into the exemption register or fails to comply with a compliance notice. There is no cap on the total financial penalties that can be imposed where multiple breaches of the legislation have occurred for commercial property.

Remember that MEEs have come out of an EU Directive therefore it is possible that the UK will look to lessen the obligations or increase the applicable exemptions post Brexit and once the consequences of the legislation have been tried and tested.

Exemptions

A Landlord may not need to comply with MEEs if:

  • Lease is for less than six months or more than 99 years
  • Work required to achieve the minimum energy efficiency standard does not satisfy a seven year payback test (i.e. that the works pay for themselves in energy savings in seven years)

A landlord may get a Temporary Exemption for five years if:

  • Third party consent is required to complete the necessary works (tenant, local authority planning permission, mortgagee) but cannot be obtained despite reasonable efforts;
  • The works would result in reduction to the market value of the property of 5% or more
  • All relevant energy efficiency improvement works have been made by the landlord (or none can be made) and the property is still substandard

A landlord may get a temporary six month exemption in order to complete the works if it has become a landlord ‘suddenly’ or it would be inappropriate for it to comply with MEEs immediately:

  • it has granted a renewal lease under the 1954 Act;
  • it has granted a lease under a contractual obligation;
  • lease is granted by court order;
  • lease is granted by operation of law.

Exemptions are not valid unless the landlord registers it.

Further thoughts

  • approximately 18% of UK commercial property will be effected by the new regulations
  • the most common types of ‘work’ that can upgrade the EPC to a satisfactory level are: lighting, the presence of an air supply and/or extract system and insulation. It’s worth keeping these in mind if you don’t have an actual EPC/surveyors report stating what is required in the specific circumstances.
  • the aim is to make buildings better and cheaper to run therefore it should – in the long run – be a win-win situation.
  • a landlord cannot refuse to grant a renewal lease even if the property is substandard and therefore illegal.
  • the grant of a tenancy at will or agreement for lease are unlikely to require MEEs compliance so could be granted whilst works are completed.
  • landlords will clearly look to recover the costs of works from the tenants where they are able to do so: both under the terms of existing leases and by drafting MEE specific terms into new leases (note that on lease renewals a landlord cannot necessarily put in bespoke drafting unless the tenant agrees to it).
  • if you are acting for a landlord of substandard property then you will probably want to negotiate MEE specific clauses into the new lease (primarily allowing access for works and tenant obligations to ensure compliance) however regard should be had to the potential effect on rent review etc. Also, if a landlord puts in a clause requiring the tenant to allow access for works then it would presumably struggle to register for a five-year exemption on the basis that the tenant wouldn’t consent to works being done – something which it might want to do.
  • tenants that may wish to sublet will also need to consider the MEEs implications as they may themselves become landlords required to comply with the Regulations.
  • if you are acting for a tenant of substandard property and they are happy with the property as it is then they may prefer the new lease to be granted prior to April 2018 and without MEEs clauses. After April 2018 a tenant may decide to refuse consent for the landlord to undertake the works (assuming they are entitled to do so under the lease) thereby allowing the landlord to register for a 5 year exemption. This is something which both parties may be happy with.
  • some tenants may prefer to give the landlord access to carry out works to make the building more efficient which could, in turn, save them costs in terms of energy bills going forward. They may be obliged to pay for some of those works through the service charge provisions and the better property could result in a higher rent in the future. Either way, there is no right or wrong way it is very fact specific. If a tenant is unsure then they could review (or obtain) the relevant EPC so that they can see what the issues are and what kind of works are being advocated so that they can understand the likely level of disturbance.
  • there may be some effect on dilapidations claims: for example, tenants could argue that some works claimed by the landlord will be overridden by works that the landlord is obliged to carry out in order to comply with MEEs. The landlord may also prefer the tenant to leave some works that it has undertaken in place rather than stripping out as stripping out could reduce the EPC rating.

CONTACT AMY

If you would like more information or advice relating to this article or a Property Litigation matter, please do not hesitate to contact Amy Sevier on 01727 798033.
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